Bloomberg News

Naked-Image Scanners to Be Removed From U.S. Airports

By Jeff Plungis
January 18, 2013

A Transportation Security Administration (TSA) employee, center, is scanned during a demonstration of the Rapiscan Backscatter advanced imaging technology machine at Logan International airport in Boston on March 5, 2010. Photographer: Michael Fein/Bloomberg

TSA will end a $5 million contract with OSI’s Rapiscan unit
for the software after Administrator John Pistole concluded the
company couldn’t meet a congressional deadline to produce
generic passenger images, agency officials said in interviews.

The agency removed 76 of the machines from busier U.S.
airports last year. It will now get rid of the remaining 174
Rapiscan machines, with the company absorbing the cost, said
Karen Shelton Waters, the agency’s assistant administrator for
acquisitions. The TSA will use 60 machines manufactured by L-3
Communications Holdings Inc. (LLL:US), the agency’s other supplier of
body scanners, and will move some scanners to busier airports to
reduce waiting times.

“It became clear to TSA they would be unable to meet our
timeline,” Waters said. “As a result of that, we terminated
the contract for the convenience of the government.”

OSI Systems rose $2.37, or 3.5 percent, to $70.02 in Nasdaq
trading.

The decision to cancel the Rapiscan software contract and
remove its scanners wasn’t related to an agency probe of whether
the company faked testing data on the software fix, Waters said.

Operational Tests

In November, Representative Mike Rogers, then chairman of
the House Transportation Security subcommittee, wrote in a
letter to Pistole that the company “may have attempted to
defraud the government by knowingly manipulating an operational
test.” Rogers, an Alabama Republican, said the panel had
received a tip about falsified tests.

Rapiscan has denied manipulating data or information
related to the reviews.

OSI Systems is “pleased to reach a mutually satisfactory
agreement with the TSA” that will involve moving the machines
to other government agencies, Chief Executive Officer Deepak Chopra said in a statement. The company, based in Hawthorne,
California, said it expects to report a $2.7 million one-time
charge during the quarter that ended Dec. 31.

OSI Systems hasn’t sold a body-image scanner to TSA in two
years, and the company’s share price has been down since a
November House hearing, said Timothy Quillin, a technology
analyst with Stephens Inc. in Little Rock, Arkansas.

‘Positive Outcome’

“They hadn’t really intended to sell more body scanners to
airports,” said Quillin, who has an overweight rating on OSI
Systems. “To have a resolution to just cancel the contract on
the privacy software development is a positive outcome.”

The TSA accelerated its use of advanced scanners in 2010
following the failed Dec. 25, 2009, attempt by Umar Farouk Abdulmutallab to blow up a Northwest Airlines flight by igniting
explosives in his underwear.

L-3 scanning machines rely on millimeter-wave technology,
which uses radio frequencies that can find both metallic and
non-metallic items. Rapiscan’s machines are based on backscatter
technology, which uses low-dose X-ray radiation to detect
objects under a passenger’s clothes.

Airline passengers were offended by the revealing images,
including those of children and the elderly. The Washington-
based Electronic Privacy Information Center sued the agency in
July 2010, claiming the scanners violated privacy laws and has
called use of the machines equivalent to a “physically invasive
strip search.”

Privacy Objections

Under pressure from privacy advocates and some members of
Congress, the TSA moved its screens to separate rooms away from
airport security checkpoints. Officials monitoring the scanner
images alert agents if they see a possible risk.

The agency put out a contract in August 2010 asking L-3 and
Rapiscan to develop the software to make images less revealing.
L-3 developed its product in 2011, according to John Sanders,
the TSA’s assistant administrator for security capabilities.

Rapiscan recently indicated to agency officials that it
couldn’t deliver its software until 2014, Sanders said. It
couldn’t come up with an algorithm that met the agency’s
standards for accurately detecting objects without generating
false alarms, he said.

‘Everybody’s Alarming’

“You can have a high probability of detection but a great
deal of alarm,” Sanders said. “Everybody’s alarming. That
doesn’t work from an operational perspective.”

TSA has contracted with L-3, Smiths Group Plc (SMIN) and American
Science & Engineering Inc. (ASEI:US) for new body-image scanners, all of
which must have privacy software. L-3 and Smiths used
millimeter-wave technology. American Science uses backscatter.

The agency’s strategy for handling passenger traffic relies
on the capability of L-3’s millimeter-wave machines to process
passengers in about half the time for Rapiscan machines,
Sanders said. TSA will be getting about 60 more L-3 scanners in
January and February, he said.

TSA is also planning to move some scanners from airports
where they’re underutilized, Sanders said. The agency plans to
expand the PreCheck program, in which passengers share personal
data before going to the airport in exchange for less-invasive
screening that lets them keep their belts and shoes on.

PreCheck Passengers

Sanders said the Rapiscan units did their job by screening
130 million passengers, and the agency wouldn’t have acted if
not for the congressional mandate for privacy software.

“We are not pulling them out because they haven’t been
effective, and we are not pulling them out for safety reasons,”
Sanders said. “We’re pulling them out because there’s a
congressional mandate.”

The TSA is talking to other government agencies with
screening needs that might not require the same level of privacy
called for in a crowded airport, Sanders said.

Rapiscan sells its body-image scanner, known as the Secure
1000, to the Pentagon for screening visitors and to U.S. forces
in Iraq and Kuwait, according to federal contract databases. The
company’s website also says it sells the machines to prisons.

To contact the reporter on this story:
Jeff Plungis in Washington at
jplungis@bloomberg.net

To contact the editor responsible for this story:
Bernard Kohn at
bkohn2@bloomberg.net